retail environment

The Importance of Peakonomics

For most people in the Western world, the seasonal build up to December 25th is like living inside a snow globe that is shaken once a year to release the magic of Christmas. However, to create this frenzied yet temporary blizzard, and the illusion that the world is coated in glitter, the retail community has to take a more rounded view from outside the bubble. Yes, ‘tis the season to be jolly, but when you have been planning the 2017 “assault” since the spring or even the Christmas before as part of a perpetual peak period, it is hard to be stirred, let alone shaken.

It is the time of year when the nations of Europe spend and indulge the most, whether on the traditional 25th of December in the UK or on Christmas Eve like in Sweden. According to a report by international banking group ING in 2014, the first year that Black Friday became more of a global phenomenon, it was the Brits that spent the most on gifts, splashing out a massive €440 per person, followed by France and Luxembourg (€300). However, in terms of their personal indebtedness, it was the Romanians who topped the league because they dedicated more than a third of their December salaries to the celebrations, closely followed by the Czech Republic. The lower-spending Belgians and Dutch only appeared to invest less in December 24th and 25th because they celebrate St. Nicholas Day earlier in December.

But importantly, the same report highlighted an interesting statistic. Putting the cultural differences aside, almost half of the 12,000 respondents did not know exactly what they would spend, and almost 30 per cent said they did not worry about it, regardless of their financial situations.

The average number of Europeans in post-Christmas debt as a result of over-indulgence was 9 per cent, but this figure was 20 per cent in Romania and 17 per cent in the UK. This is good and bad news for retailers as they all want a bumper Christmas, but taking the longer view, they know that there will be a slowing of spending earlier in the New Year when credit card bills start to land on doormats.

Peakonomics

‘Tis the season to deck the halls and be jolly, and because it is the most important sale period of the year, retailers have to take a more pragmatic and long view of the “peakonomics” of the season with the hope of being able to deliver a city-pleasing bumper stocking come January to offset what might be a profits hangover later in the year.

While the general population is humming “holidays are coming” as the first advert involving a brightly illuminated popular soft drink truck hits the TV screens, many retail risk professionals are struck by another kind of frightening reality - “winter is coming,” the motto of House Stark in the fantasy drama Game of Thrones, a warning to be constantly vigilant as it is the season that hits their land the hardest.

While most customers are prepared to suspend disbelief and swallow the “Santanomics” of the season - rather like the 150 billion calories of mince pies and milk Father Christmas consumes annually and still manages to fit down 640 million chimneys to single-handedly deliver gifts for the 1.85 billion children on the planet in just thirty-two hours (allowing for the curvature of the planet and shift in time zones) - many in retail prefer not to invoke the “C word” until they are counting the post-peak cost in January.

For retailers, Christmas itself “butters no parsnips” as the season has already been shunted backwards into the previous months of October and November with the introduction of Black Friday and Cyber Monday, which many have viewed with additional trepidation as the “nightmare before Christmas.”

This means that peak planning and forecasting really start to tighten their grip during the summer months when most of the rest of us are still in shorts and sandals and long before the first leaf of autumn has fallen from the trees.

In reality, retailers are either planning for, executing, or counting the cost of peak of Christmas as part of a vicious yet lucrative circle. So instead of repetitive jingles, you are more likely to hear the words “bah humbug” uttered from the lips of those who, rather than decking the halls, were picking in the aisles of the distribution centres (DCs).

These DCs and the thousands of courier deliveries resulting from the prolific growth in online retail in the last few years have driven what the Nottingham-based Centre for Retail Research (CRR) described as a nation of retailers seemingly running a 365-day a year “sale” with offers aplenty to stimulate trade.

Christmas 2014 saw, for the first time with the introduction of Black Friday and Cyber Monday, two late-November shopping imports from the US that acted rather like a defibrillator to stimulate what could be sluggish pre-Christmas trade. However, for a few participating brands, the event over-stimulated excitement and demand resulting in ugly scenes inside and outside stores and overwhelming existing security provision so that additional Police assistance was required. The ensuing criticism resulted in a toning down of the event in following years resulting in a lengthening of the discount period in order to control excess demand.

However, in its Christmas Retail 2016 analysis, the CRR said the season “was better than many had expected and continued the pattern of reasonable trading since the Brexit vote. Retailers seemed to be on permanent discount. The November Black Friday/Cyber Monday weekend became ten days of offers and promotions, and was preceded by offers and followed by other offers.”

The report, which defined Christmas as the six weeks between mid-November and the end of December, suggested that while such events generated sales, the knock-on effect resulted in less footfall over the period as a whole.

It said, “Not surprisingly, this pulled forward sales from December, which became rather flat for everyone except electrical goods specialists and the grocery and licensed victuallers. Shoppers had returned to physical stores on the Black Friday weekend, which were quite busy and was certainly a pleasant difference compared to 2015. The period was practically trouble-free. Although the threat level from international terrorism against the UK was classed as severe, people continued shopping.

“However, compared to several previous Christmases, there was an unexpected dearth of shoppers in the main cities on many days, whilst the smaller retail centres looked like ghost towns. All that was missing was tumbleweed blowing through the streets. This is part of a trend by shoppers, but is accentuated by periods after retailers have reduced prices, when shoppers see no need to go shopping if they might get things cheaper the following week. Thus there can be games of ‘dare’ between shops and shoppers, trying to find out who will break first. Ten years ago, reducing prices before Christmas was seen as evidence of a retailer in trouble: these days everyone does it.”

The trend can, in part, be attributed to the growth in online retail with the switch to e-commerce continuing apace. Online sales rose by 12.9 per cent compared with only a 1.9 per cent increase for total retail sales in Christmas 2016. Total sales (traditional shop retailers plus online retailers) were £77.6 billion over Christmas 2016, of which online sales were £21.0 billon (27% of all retail sales).

The CRR view is that online retailers have 15 to 16 per cent of the UK retail market, according to their annual surveys. In the next few years, the continued fast growth could mean that e-commerce is likely to gain one-fifth (20%) of all annual retail trade by 2020 or 2021 and perhaps one-quarter (25%) by 2025. This, the CRR suggests, is dependent on nothing else changing and the online future being a linear continuation of our recent past.

However, continued uncertainty around Brexit, wage stagnation, a weak pound, and inflation-fuelled price hikes could dent these predictions for 2017 in the same way that Christmas was impacted in 2008 immediately following the financial crash. At that time, although the number of people admitting to shoplifting declined by almost 8 per cent over a twelve-month period, according to the Sixth Annual Retail Crime Survey by G4S Secure Solutions (UK), retail shrinkage remained a significant issue with approximately 2.4 million British adults admitting to shoplifting goods valued at over £650 million.

Although overall levels of shoplifting were down, G4S prophetically warned that the pressure to give expensive presents, despite many family budgets being stretched to breaking point, would prove too tempting for thousands of Britons to shoplift. The security giant’s research revealed that almost 500,000 adults admitted that they would consider shoplifting over the festive season to provide a present for a friend or family member. Larger retailers were particularly at risk as the survey revealed that over a twelve-month period around one in ten (12%) of shoplifters stole because they believed the “store was a big retailer, so it would not matter.”

While the majority admitted to stealing items worth between £1 and £25, over 60,000 people admitted to stealing goods worth more than £500 in total during that period. By 2013, which was still in the grips of so-called austerity Britain, Christmas theft had risen to almost £1 billion, up almost 10 per cent year on year since the “crash,” according to the CRR.

It cannot be ruled out that such a sluggish performance could also trigger a wave of so-called “need not greed” shop theft of essentials such as meat and cheese.

Peak Performance

But peak is not all about loss through dishonesty - it can be “man-made” by the businesses themselves. Retailers in the physical and online spaces that do not accurately forecast demand and communicate that to their chosen suppliers and carriers so that they can adequately resource their delivery channels - personnel and vehicles - can come as unstuck as a poorly wrapped gift.

There is a major - and probably unexpected and unwelcome - issue surrounding goods lost in transit (GLIT), the so-called friendly fraud, but more importantly the lack of availability in the supply chains triggered by poor forecasting and a breakdown in communication between the online retailers and the carrier community.

This was crystalised during a presentation by Ken Semple, head of security at DX Group, at the Retail Risk conference at the King Power Stadium in Leicester in October. He said that forecasting was critical in light of the 60,000 shortfall in drivers in the industry, a fact driven by the ageing population (the average driver age is fifty-four), a weak pound, and Brexit, which has resulted in thousands of European agency drivers leaving the UK.

“Forecasting is therefore critical. We now work closely with our customers to protect goods. We also share information in the prediction of peak because if we get inaccurate forecasts, it is more difficult today to resource additional drivers and vehicles at short notice.”

His warning, it seems, has in part been heeded. On a more positive note, there has been a coming together of minds with evidence that the online retailers and the carriers are indeed working more closely together to understand the demand landscape leading up to peak.

A survey of online retailers and carriers conducted by LP Magazine Europe revealed that more than two-thirds of the businesses polled were seeing marked improvement in communication between themselves and their carriers resulting in more deliveries getting to their destinations on time and with fewer customer complaints being received.

Although there are still instances of whole vehicle loads of high-value stock being stolen at peak, investment in better analytics including vehicle telematics, fraud checks, and staff vetting in some quarters has contributed to this result with some drivers also being incentivised to bring stock back to the depots if they are suspicious of addresses or people.

But peak is a volume business where the normal levels of demand go out of the window, and again, many of those surveyed suggest that normal fraud checks were relaxed or turned down to deal with the quantity of goods going through the system. Ironically, fraudsters, it would seem, can also come unstuck here as volumes also increase vigilance, according to some surveyed who said the combination of additional staff to cope with peak and the resultant fewer idle hands meant more attempted frauds were being thwarted.

There is also evidence to suggest that businesses are getting better at managing their reverse logistics processes around peak. Only two years ago, Dale Rogers, PhD, the US professor of logistics and supply chain management and co-director of the Centre for Supply Chain Management at Rutgers University, said companies needed to work harder at managing reverse processes, or they will experience a “constant leak of profit.”

He was referring to research that found that more than half of all businesses surveyed didn’t have the capability to determine if returned goods should be discarded, returned to a vendor, or moved back into inventory. The survey also found that 44 per cent of distribution centre managers consider returns a “pain point” in their operations.

The survey carried out during the summer of 2017 by LP Magazine Europe suggested that the growth of click and collect and the ability to return online deliveries to store, as well as additional staff at DC level, resulted in a marked improvement of recycling inventory and getting it ready for resale.

This is backed up by the greater use of retail analytics and operations and LP teams working together. This co-operation extends to full briefings on new releases in time for peak - the new iPhone X, for example - so that all parties, including the third-party carriers, are extra vigilant around high-value and highly desired products. However, measurement of shrink is now not so much focused upon theft, but full traceability through the supply chain and on-shelf availability - the “selling more and losing less” model.

E-commerce is still in its infancy, but every year there are incremental improvements as retailers get better at tweaking their models. Volumes are high at peak, but on the flip side, so are returns as focus has at last been given over to GLIT and the management of reverse logistics so that visibility and better communications can help pinpoint and correct areas of vulnerability.

Most carriers report fewer GLIT claims at peak due to the sheer number of people involved, but one area of concern is the sustainability of the existing online growth. As we discussed earlier, a shortage of delivery drivers caused in part by increased costs, such as the implantation of compulsory CPC (Certificate of Professional Competence) driving qualifications, is pushing up delivery prices to the point where 28 per cent of all online transactions are abandoned because of the perceived high price of carriage. This is in part the fault of the retailers who did little to monetise delivery in the early days so that consumers got too used to “something for nothing” and are now reluctant to play catch up.

There has to be a new conversation about the cost of online retailing so that retailers and the carriers make reasonable enough margins to in turn incentivise an increase in the number of drivers to meet the demand and to improve the quality of the existing services.

Brexit, stagflation (the convergence of low wages and slow economic growth), and the increased cost of living could make for a more challenging peak than last year because of the simple economics of less spending power. Every retailer will tell you that Christmas is the season to chase the money because it is the focal point of the year where people will spend regardless of whether they have the cash or not. But inevitably, with less money to go around this season, the flakes in the shaken snow globe will have to settle at some point.

Consequently, there may be a delayed 2018 impact as there is every likelihood that consumers will have used their increasing levels of personal debt to fund pre-Christmas spending. And rather like the inevitable charge-backs caused by reduced levels of fraud prevention to help lubricate sales during Christmas, it will be next year before the financial hangover of 2017 kicks in - just in time to start planning for peak.